New Government Plans to Relieve Burden on Lower Income Groups
ResearchCalculations on the Effects of the Coalition Agreement
The plans of the ‘traffic light coalition’, named after the parties’ traditional colours, to increase the minimum wage and introduce a basic child allowance (Kindergrundsicherung) will have a positive financial impact, especially for low-wage earners. Both measures will lead to higher incomes for up to ten million Germans, according to calculations by ZEW Mannheim on behalf of Süddeutsche Zeitung. The calculations are based on the economic model ZEW-EviSTA and data of the Socio-Economic Panel (SOEP).
“Households with an annual income below 20,000 euros benefit the most from the planned measures of the new coalition government,” says Professor Sebastian Siegloch, head of ZEW’s Research Department “Social Security and Redistribution”. Raising the minimum wage from currently 9.60 to 12 euros per hour and increasing the generosity of child allowances would result in an additional 700 euros for this income group – an increase of five to six per cent.
Because of the child allowance increase, not only low-income families will benefit. Families with incomes between 30,000 and 80,000 euros can expect to receive 1,000 to 1,300 euros from this measure, if the Green Minister of Family Affairs wins support for her party’s model. According to this model, the basic child allowance would combine the child benefit, child-specific social benefit and child supplement, which have so far been separate benefits. The proposed basic allowance, which all families would receive regardless of their income, would be higher than the current child benefit.
Scrapping the solidarity surcharge without replacement would disproportionally benefit high earners
“The minimum wage increase and the new basic child allowance would reduce income inequality,” explains ZEW economist Siegloch. Assuming that the basic child allowance is introduced, the Gini coefficient, which measures inequality, would fall by about four per cent. “Whether the traffic light coalition’s policies will lead to a balanced redistribution, however, depends on what measures the new government will take if the solidarity surcharge is abolished.” The Federal Constitutional Court already called for a reform of the surcharge, which is still levied on the top ten per cent of income earners. In 2022, the court wants to decide whether the surcharge must also be scrapped for top earners. “If the solidarity surcharge were abolished without replacement, very high incomes would be relieved to a greater extent than the middle class. That would not make sense in terms of income redistribution,” Siegloch explains. Households with an annual income of more than 250,000 euros would be relieved by 3.2 per cent, similar to those with incomes between 20,001 and 55,000 euros. For the broad middle class with an income of 55,001 to 80,000 euros, on the other hand, the relative income increase would be smaller. “Instead of disproportionately relieving the top ten per cent, the current solidarity surcharge could be integrated into income tax without affecting redistribution or tax revenue,” says Siegloch.
Basic child allowance and solidarity surcharge make balanced budget less likely
According to the ZEW calculations, the impact of the coalition parties’ social policy measures on the national budget depends above all on how the basic child benefit will be designed and whether the solidarity surcharge will be abolished without replacement.
“For our analysis, we simulated three basic child allowance models discussed in the election campaign, which the planned coalition working group could follow,” explains ZEW economist Professor Holger Stichnoth, who contributed to the study. The researchers took into account changes in income tax, the revenue from social security contributions and the expenditure on child benefit as well as other state social transfers, including the basic child allowance of the Greens, the proposal of the German Trade Union Confederation (DGB), supported by the SPD during the election campaign, and the child opportunity allowance (Kinderchancengeld) of the liberal FDP.
According to a calculation by ZEW Mannheim, introducing the basic child allowance by the Greens would cost the new government 9.6 billion euros per year. The DGB’s basic child benefit, on the other hand, would bring the state additional revenues of 1.5 billion euros, and the FDP’s child opportunity allowance even 7.1 billion euros. “The surplus results mainly from additional income tax and solidarity surcharge revenues. In addition, the volume of social security contributions will increase if the government raises the minimum wage to twelve euros,” explains Dr. Florian Buhlmann, co-author of the study.
Abolishing the solidarity surcharge without replacement would result in a revenue shortfall of eight billion euros for the federal government. Together with the basic child allowance, this would increase the deficit in the national budget by between 0.6 billion euros (FDP model) and 17.6 billion euros (Green model).
